Over the past several weeks, the media has been buzzing with reports about the student loan debt crisis and rising federal loan interest rates. It is a positive signal that these issues are receiving attention from policymakers and late night talk show segments, but the atmosphere surrounding college affordability remains politically charged. It is still uncertain whether this spotlight will result in lasting improvements, temporary solutions, or simply serve as a background for political agendas.
Even if we are a long way from consensus on improving the accessibility and affordability of higher education, there are organizations leading the way with innovative new approaches. For example, the start-up SoFi is creating new peer-to-peer lending networks by connecting alumni and students to offer low-interest education loans. Additionally, established companies and even government organizations have begun to challenge the traditional models of college finances. As news outlets continue to report on the student debt crisis, it is valuable to highlight the organizations that are helping to improve financial literacy and college affordability for students.
Peer-to-peer educational lending is not a new concept, but SoFi (Social Finance) has gained tremendous momentum in just its first year by creating a true social lending network. The company launched in 2011 with a $2 million pilot program at Stanford, providing loans to 100 students with funds contributed by alumni. The loans carry a competitive 6.24 percent fixed interest rate, and include many of the same features and benefits of federal Stafford loans.
“We wanted to change the system for the better,” says Mike Cagney, SoFi CEO. “Traditional banks are inherently antisocial, and with SoFi we are creating a new network where both lenders and students are engaged in the borrowing.” Lenders serve as mentors to students, helping them manage their debt and secure quality jobs after graduation. Likewise, students take on added responsibility for their loans, knowing that if they default, they are defaulting on their own alumni network. Cagney explains further: “These benefits are a natural function of the community. Social is by definition local, transparent, and participative.”
In 2012, SoFi plans to provide $150 million in loans to both in-school students as well as recent graduates looking to consolidate. Programs have already expanded to 40 universities, with many other schools expressing interest. Cagney is confident that the model is scalable, and so far programs are resonating across students, alumni, and the partnering universities.
Consumer Finance Protection Bureau
Innovation is not just limited to corporations. The Consumer Financial Protection Bureau (CFPB) has created an interactive Cost Comparison Worksheet that compares schools based on the average financial aid packages available. Often, students pay significantly less then the “sticker price” of tuition based on their specific financial need. By increasing transparency into college affordability, students can make more informed decisions about higher education.
The CFPB leverages the data resources of the Department of Education to compare stats such as graduation rate and federal student loan default rate across schools. Additionally, students can see average debt loads or estimate their own loans based on expected financial aid. Innovation is not just new ideas, but can be as simple as new approaches to information.
In an interview with Political Fiber, CFPB Associate Direction Gail Hillebrand outlined the motivation for the tool: “There’s a tremendous need for people of all ages, but especially young people, to have knowledge and the capability to manage money and avoid the missteps that can really hurt their economic futures.” This tool builds upon politicians’ call for increased financial literacy, and more interactive tools will only better prepare students to plan for the costs of higher education.
Improving students’ personal finances while also helping to pay down loans is the approach of SmarterBank, a virtual checking account with an innovative rewards program. Students perform all their banking online, and access their money through more than 40,000 ATMs across the country. Compared to other checking accounts, SmarterBank fees are in-line or lower than the competition. But, as CEO Kevin Walker explains, “What really sets it apart is that SmarterBank gives customers a way to easily earn rewards that go toward paying down student loans.”
The SmarterBucks rewards range from 0.5 percent for basic signature transactions to between 4 to 8 percent for purchases made through SmarterBank’s preferred merchant portal. These savings are then used to pay down student’s existing debt, helping them save thousands over the term of their loans. It is rare for checking accounts to offer any rewards, which highlights SmarterBank’s commitment to helping students.
In addition to the SmarterBucks reward program, SmarterBank, offers a suite of tools for students to manage their debt loads. The PayBackSmarter calculator shows how much money students can save over the term of their loans through rewards or small increases to their monthly payment. Walker describes SmarterBank, an offshoot of SimpleTuition, as combining elements from Mint.com and Upromise: “For many recent college graduates, the struggle of managing student debt is a defining part of their economic lives. SmarterBank helps by providing a path toward getting out of debt faster.”
Despite doom-and-gloom projections of rising student loan debt, these three organizations represent successful new approaches to financial literacy and college affordability. By providing new connections, new transparency, and new ways to save, these innovative models lead the way to smarter financial decisions for students.
Joseph Audette is the VP of Education and Financial Literacy for NerdWallet, a personal finance website dedicated to bringing unbiased advice on students finances, checking accounts, and baggage fees.